Hedge fund Solus to close flagship investment vehicle
Distressed investment specialist knocked by heavy redemptions and sub-par performance
Solus Alternative Asset Management, one of the best known specialists in distressed investments, is closing its flagship fund after suffering a combination of heavy redemptions and poor performance.
The hedge fund, which as recently as November managed $4.3bn in assets, is one of the first casualties of a collapse in the price of riskier assets this week. In a letter to investors in its Sola vehicle on Tuesday, the firm offered them the option to transfer their investments into new funds or face “an orderly liquidation” that would return their funds “as soon as practicable”.
“Due to the evolving state of the markets, this has left our flagship fund Sola with a high concentration of less liquid assets,” the letter said.
The Financial Times reported in December that Sola had suffered big losses after making a number of ill-fated bets on companies including satellite operator Intelsat and Pacific Gas and Electric. The fund finished the year down more than 8 per cent, after a 15 per cent drop in 2018. It had assets of about $4bn at the turn of the year.
Solus’s letter to investors said that “unexpected withdrawal requests” had followed reports of the firm’s difficulties in the financial press.
The company declined to comment.
Solus emerged as one of the most high-profile distressed investment firms in the US after its skirmish with Toys R Us employees in 2018 and a legal battle over derivatives with a Blackstone-owned hedge fund, GSO Capital Partners.
Now, though, it has become a victim of a string of corporate collapses that have tripped up US distressed investment funds, which look to profit from buying stocks and bonds of struggling companies at bargain prices.
Shares in Intelsat, a heavily indebted satellite group popular with hedge funds, collapsed as much as 75 per cent in November after a US regulator rejected its plans to raise money by selling off its airwaves. Some of the company’s bonds are now trading at about one-third of face value, as bondholders are braced for a potential wipeout.
Shares in two of Solus’s other equity investments, US coalminer Contura Energy and offshore drilling services group Hornbeck, both dropped about 90 per cent last year.
An investor report from January showed that 22 per cent of Sola’s exposure was to “energy equipment and services” companies: a sector that has been hit by a growing distaste among investors towards fossil fuels and, more recently, a sharp fall in the oil price.
Many other distressed specialists are smarting from bets on energy-related companies turning sour. Blackstone’s GSO faced ruptures in its distressed investment unit last year, for example, due in part to bad bets on ailing oil and gas groups, such as Oklahoma-based Tapstone Energy.
Investors who stick with Solus face two options.
They can switch over to what the firm calls a “long-term opportunities” fund that looks to invest in thinly traded assets. Alternatively, they can lock up their investments until 2021, by which time Solus will sell its illiquid holdings and reinvest the proceeds in more easily tradeable assets.